Venture Ecosystem FactBook: Chicago 2017

Transcription

1 Venture Ecosystem FactBook: Chicago 2017

2 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Content GARRETT JAMES BLACK Manager, Custom Research & Publishing REILLY HAMMOND Data Analyst JENNIFER SAM Senior Graphic Designer Contents Contact PitchBook pitchbook.com RESEARCH Introduction 3 Chicago in the US Venture Ecosystem 4 Economy 5 Investment Activity 6-10 Exits & Fundraising League Tables 13 The PitchBook Platform The data in this report comes from the PitchBook Platform our data software for VC, PE and M&A. Contact sales@pitchbook.com to request a free trial. EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com COPYRIGHT 2017 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. 2

3 Well-positioned, yet underserved at the late stage Introduction Third in our series of reports focused on exploring US venture ecosystems at a more granular level, the Chicago FactBook offers multiple contextual datasets woven together with analysis of the current domestic venture environment. When it comes to venture capital, analysis can be particularly challenging given the nature of the model, especially when it comes to quantification of risk. Moreover, if the past 20 years of financial history have taught us anything, it s that overreliance on quantitative methods and modeling can be uniquely dangerous. Hence our preference for frameworks of analysis that, while benefiting from quantitative grounding, remain primarily qualitative. One of our preferred frameworks for analyzing datasets at a certain level of geographic granularity is that of the ecosystem, wherein the overlapping cycles of fundraising and investment reinforce each other via key nodes of informational flow. Consequently, in the following pages, we trace the evolution of the Chicago venture scene over the past decade through an ecosystem lens. Especially as the Chicago venture ecosystem has been growing steadily, it appears to be approaching a level where, as one venture capitalist put it, local entrepreneurs may no longer do a tour of duty in Silicon Valley before returning. Furthermore, Chicago s corporate landscape is intriguing given the role of human capital in a venture ecosystem. Multiple Fortune 500 companies call the city home, and yet, likely due to their particular sector, many don t acquire local startups at an anticipated clip as of yet. Regardless, the fact senior or high-level employees and talented individuals in general are readily available has and will continue to be key. The company you keep matters, after all. With that and recent healthy fundraising levels, plus continued outside investor interest, Chicago s VC ecosystem looks poised for continued growth barring tail risk without one seminal, transformative turning point as of yet. Look up a company. And its cap table. And its investors. And its EBITDA multiples. And its board members. In seconds. The PitchBook Platform has the data you need to close your next deal. Learn more at pitchbook.com We welcome your feedback and questions reach out to us at reports@pitchbook.com. I d like to thank Hyde Park Angels, Origin Ventures, Adams Street Partners, ARCH Venture Partners, Alex Meyer of HBS Angels of Chicago, Illinois Venture Capital Association, the Polsky Center for Entrepreneurship & Innovation, Chicago Ventures, KDWC Ventures, John Pletz, Hyde Park Venture Partners and the National Venture Capital Association, among others, all of whom assisted in the production of this report. GARRETT JAMES BLACK Manager, Custom Research & Publishing 3

4 Chicago in the US Venture Ecosystem Snapshot of Chicago MSA s size within the US venture ecosystem as a whole In early August 2016 we released the first US Venture Ecosystem: FactBook, the largest PitchBook report ever and a compendium of venture and relevant economic datasets for the top 12 (by overall venture activity) metro areas within the US. As a recap, we have reproduced the table ranking the size of the 12 venture ecosystems below, to provide some context for how Chicago stacks up. The most striking thing at the outset is that Chicago, despite its overall size, is in the middle of the rankings. There are many reasons for that result, ranging from historical to geographic. As with any ranking that could be prone to raising hackles, it is critical to note that size does not correlate with health. Moreover, the Bay Area and Valley predominate to such a degree that it is clear the VC industry currently remains highly concentrated. Note: As of 6/30/2016, this ranking was generated by weighting capital raised, VC invested, VC activity and venture-backed exit value equally, tallying up their ranking in each area, then summing and sorting from lowest to highest, with a lower score indicating a larger ecosystem. MSA* Size of VC ecosystem, ranked Total VC funds raised since 2006 Total VC invested since 2010 Total # of VC rounds since 2010 Total exit value since 2010 San Francisco #1 #1 $117.6 billion #1 $101.4 billion #1 9,710 #1 $90.8 billion San Jose #2 #4 $35.5 billion #2 $43.3 billion #3 4,152 #2 $63.5 billion New York #3* #2 $43.6 billion #3 $33.9 billion #2 6,174 #4 $17.6 billion Boston #3 #4 $41.2 billion #4 $30.7 billion #4 3,664 #3 $28.7 billion Los Angeles #5 #9 $2.7 billion #5 $21.3 billion #5 3,403 #5 $11.2 billion Seattle #6 #5 $7.6 billion #7 $8.4 billion #6 1,717 #10 $6.7 billion Chicago #7 #7 $3.4 billion #8 $8.3 billion #9 1,348 #6 $9.95 billion Washington, DC #8 #6 $4.8 billion #9 $8.2 billion #7 1,416 #9 $7.4 billion San Diego #9 #11 $1.5 billion #6 $9.4 billion #10 1,317 #7 $8.7 billion Austin #10 #10 $1.9 billion #10 $6.6 billion #8 1,376 #12 $3.7 billion Philadelphia #11 #8 $3.0 billion #12 $4.8 billion #11 1,003 #11 $5.4 billion Atlanta #12 #12 $1.15 billion #11 $5.0 billion # #8 $7.8 billion Source: PitchBook. *New York and San Jose technically tied but given San Jose s exit value and VC invested we gave it second place. Note that PitchBook uses the US Census Bureau definition and delineation of metropolitan statistical areas. 4

5 Relatively healthy Chicago s current economic condition & recent trends Chicago contrasts with Illinois as a whole when it comes to economic growth. Cook and Collar counties accounted for close to 87% of private-sector jobs added in the state since the depths of the recession. Especially as they pertain to the entrepreneurial/startup ecosystem, most statistics point to relative health in Chicago, with sentiment waxing positive among employers and income growing slightly faster than prices. One negative statistic in the table to the right testifies to one of the likely reasons recent CBRE research ranked Chicago 13th in terms of tech-talent market health in North America: The population of millennials declined by 5% between 2009 and (That migration resembles Illinois s, with 114,000 lost to domestic migration against a total population of 12.9 million, the highest rate in the region.) 13th out of 50 is still more than healthy, and, moreover, Chicago is still relatively much cheaper to operate in than many other large markets, and as a consequence of its size remains remarkably diverse. Moreover, multiple large businesses have been moving their headquarters to the city ADM, Conagra Brands, Caterpillar although that signals more in terms of business appeal than increased employee counts. All in all, the Chicago economic scene is a welcoming environment without being a blockbuster growth success. One potential area of concern noted during the course of background research was pending Illinois House Bill 3393, which would levy a 2 tax on fees earned from investment management. Should a comparable federal bill pass, the measure will cease to exist 1. 1 Note: Per the Illinois Venture According to analysis by Hyde Park Angels, it costs tech firms approximately 42% more to operate in San Francisco than it does in Chicago. Chicago metropolitan statistical area (MSA) Civilian labor force, March 2017 Select statistics 3.7 million College students per 1,000 residents, Population growth, Cook County, July 16-July % Employment growth, March 16-March % Change in unemployment rates, not seasonally adjusted March 16-March 17 Compensation cost change, 12-month, not seasonally adjusted, March 16-March 17 Wages & salaries change, 12-month, not seasonally adjusted, March 16-March 17 Approximate range of change in annual fair market rents, 1-4 bedrooms, FY 2016-FY % 2.5% 2.7% 4.8%-5.5% Consumer price index (urban) annual percentage change, March ranking for startup activity, 2017 ranking for entrepreneurial growth 31, 30 S&P/Case-Shiller IL-Chicago Home Price Index, February Job growth ranking among top 200 MSAs from , Employer confidence increase, 2Q Q % Year-over-year percentage change in business barometer March 16-March 17 Current-dollar GDP, % $641 billion One-year change in Zillow Home Value Index, one-year forecast 6.4%, 2.6% Sources: US Bureau of Labor Statistics, HUD FY 2017 Fair Market Rents, PayScale, Brookings Institution, US Bureau of Economic Analysis, The Kauffman Index, Illinois Science & Technology Coalition, The Milken Institute Center for Jobs & Human Capital, Federal Reserve Bank of St. Louis, Society for Human Resource Management, World Business Chicago, Zillow, CBRE (Hyde Park Angels analysis) Capital Association, HB3393 did not end up moving forward but a comparable bill SB1719 recently was passed by the Senate and is currently assigned to the Revenue & Finance Committee in the House. IVCA notes that SB1719 is not tied to any federal measure, unlike HB3393. Further details are available here. 5

6 A gentle, temporary pullback An overview of Chicago s venture investment activity VC invested remains on pace relative to historical totals Chicago MSA venture activity $457 Deal Value ($M) # of Deals Closed $ $ $ $1, $2, $790 Quarterly momentum has been subsiding Chicago MSA venture activity 230 $ $1, $1, $1, $335 Amid a general decline in VC transaction volume driven by a slide in early-stage deals nationwide, Chicago could prove different From a cyclical standpoint, the nationwide backdrop of subsiding venture financing volume suggests we are merely in the investing cycle s later stages, particularly as VC invested, median deal sizes and post-valuations remain substantial. On a yearly basis, therefore, Chicago s relative health stands out considerably, as both VC invested and deal volume were steady from 2015 to Although quarterly figures indicate a decided slackening of momentum as of late, it is especially critical to note that it takes a long time to build a venture ecosystem, so the robust increase in venture funding over the past decade is the more important point to highlight. Given the level of dataset granularity, temporality plays a more significant role as well. $1,400.0 $1,200.0 $1,000.0 Deal Value ($M) # of Deals Closed $ $600.0 $400.0 $200.0 $0.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

7 Lower costs of doing business still help mute deal metrics inflation, with a few notable outliers It s simply cheaper for venture-backed startups to operate in Chicago, in a manifestation of the region s generally lower costs dubbed the Midwest discount. Accordingly, median figures for deal size and valuations can remain less inflated than those observed on the coasts although outliers at the late stage still exist, as is evident from the charts below, and steady increases over the past few years were certainly recorded. Important consequences can ensue: Capital efficiency can be greater at times; vastly accelerated ramp-ups can be somewhat hampered, particularly when it comes to obtaining specialized talent in some segments; and syndication is often necessary for some of the larger early-stage rounds. On an anecdotal basis, however, the collaborative nature of Chicago VC is still largely intact. A note regarding the follow-on case study below: The extent to which that seeded cohort of 2010 garnered follow-on rounds is testament to a healthy progression up the capital stack, though skewed by the few, most successful repeat fundraisers. The Midwest discount still helps soften any potential inflation given the scaling venture scene Median venture financing size ($M) in Chicago MSA Case study: Tracking Chicago MSA-headquartered companies seeded in 2010 and follow-on financing rates by company count & financing type $14.0 Angel/Seed Early-stage VC Late-stage VC 5 % of ini al cohort receiving follow-on funding Late Stage Early Stage A B 3 $12.0 $ Angel C 25% $10.0 Seed 2 $8.0 $6.0 $4.0 $7.2 $4.7 $ % 1 $2.0 $0.8 $ % $ In cases where the precise series of the financing is unknown, the stage is labeled instead. Median venture financing size ($M) in Chicago MSA by early-stage series Late-stage outliers can still propel numbers high, though as sample sizes grow figures should correct Median venture post-valuation ($M), Chicago MSA $16 $14 Angel/Seed Series A Series B $8.6 $160.0 $140.0 Angel/Seed Late-stage VC Early-stage VC $143.8 $12 $5.1** $120.0 $10 $100.0 $8 $80.0 $6 $4.1 $4.7** $60.0 $54.5 $4 $40.0 $37.5 $2 $0 $0.8 $1.1** $20.0 $0.0 $19.6 $6.0 $8.0 **Indicates small sample size so not statistically significant as of yet. 7

8 With no sign of slowing, considerable efforts support the startup environment Incubators and accelerators such as 1871 Chicago, the Polsky Center and Lightbank remain active in encouraging local entrepreneurs. Different data providers on overall startup activity paint somewhat different pictures, with Kauffman ranking the Chicago MSA as 31st out of the 40 largest US metro areas. Startups with founders affiliated with University of Chicago by academic year of founding # of inac ve/acquired/non-ac ve # of startups Source: Polsky Center for Entrepreneurship & Innovation Chicago MSA VC activity (#) by round size Chicago MSA VC activity ($M) by round size 250 Under $500K $1M-$5M $500K-$1M $10M-$25M $25M+ $2,500 Under $500K $500K-$1M 200 $5M-$10M $2,000 $1M-$5M $5M-$10M $10M-$25M $25M+ 150 $1, $1, $500 0 $0 Seed corrected between in 2015 from a peak, now is steady Chicago MSA VC activity (#) by series A surge last year in Series A VC invested portends subsequent raises Chicago MSA VC activity ($) by series Seed Series A Series B Series C Series D Seed Series A Series B Series C Series D+ 8

9 The Illinois Science & Technology Coalition notes that according to their survey in the Illinois Innovation Index, state universities produced more than 800 startups from 2012 to 2016, nearly 10 more than recorded from 2009 to Contrasting that statistic with diminishing first-time financing flow in the Chicago MSA, it s clear a mild decline in the volume of rounds of the smallest size categories may have contributed to the decline. As risk heightened in tandem with even gently elevating median financing sizes, those first-time checks were written less frequently. As confirmed during background research, some of the fledgling VC funds that initially targeted smaller, local businesses have experienced subsequent success and consequently raised larger funds, targeting Series A more explicitly. Does sector diversity help or hinder? Chicago s sector diversity and sheer size are oft-noted in contrast to the fact its venture ecosystem is smaller than that of, say, Seattle. The diversity can prove useful in terms of recruiting talent in certain areas such as sales, yet what Chicago s diversity does not lend itself to is a prevailing narrative centered on the strength of its tech sector. Chicago is not necessarily A steady if slow decline since 2012 First-time financings in Chicago MSA The city itself attracts most activity City of Chicago-only venture activity # of Deals Closed Deal Value ($M) Deal Value ($M) # of Deals Closed $103 $198 $173 $108 $213 $138 $120 8 $34 $451 $1,505 $377 $609 $1,092 $1,045 $1,035 $ Due in part to fixed costs, software predominates Chicago MSA VC activity (#) by sector A plurality of VC is invested in software Chicago MSA VC activity ($) by sector 10 So ware 10 So ware Pharma & Biotech Other Media IT Hardware Pharma & Biotech Other Media IT Hardware HC Services & Systems HC Devices & Supplies Energy Consumer Goods & Recrea on Commercial Services HC Services & Systems HC Devices & Supplies Energy Consumer Goods & Recrea on Commercial Services 9

10 thought of as a tech city, and such narratives do matter when it comes to retention rates of local talent, among other issues. The probability that a senior software engineer will up and move to Chicago to take a job at a startup is potentially lower should they perceive the chances of obtaining other, similar jobs to be slim. That said, the growth of Chicago s venture ecosystem and promising state of its early-stage scene in particular hint strongly it is more a matter of time before this perception changes, as the robustness of entrepreneurial efforts continue amid the relative health Investment in Chicago MSA-based companies by investors HQ d outside Illinois only 87 $763 Deal Value ($M) # of Deals Closed 103 $ $ $ $ $602 Source: PitchBook. *As of 4/30/2017 $ $214 of Chicago s economy. Meanwhile, the talent pipeline is certainly still flowing strongly, simply due to the concentration of local universities. Outside investors still critical to underserved late-stage market Select funds such as Pritzker Group Venture Capital and Adams Street Partners remain some of the few players in the late-stage venture scene. More coastal funds have been increasing their presence, helping plug the gap, as it were, at what some called the locally underserved late-stage market. (On an anecdotal basis, some related they believed the general startup market in Chicago to be underserved, which could well be the case in some pockets of the entrepreneurial scene given overall startup volume, but in our opinion remains yet to be clearly established given the advent of multiple earlystage funds in the past few years.) Hence the preponderance of VC invested in larger rounds, although since 2014 outside firms have also been driving rounds in the middle of the capital stack. Investment (#) by size in Chicago MSA-based companies by investors HQ d outside Illinois only Investment ($) by size in Chicago MSA-based companies by investors HQ d outside Illinois only Under $500K $500K-$1M $1M-$5M Under $500K $500K-$1M $1M-$5M $5M-$10M $10M-$25M $25M+ $5M-$10M $10M-$25M $25M+ 10

11 Strong foundations Datasets of venture-backed exits and local venture fundraising in Chicago Recent exit volume lays groundwork for future recycling of talent & capital A key point for the Chicago VC ecosystem has been the recycling of both human and financial capital, after a handful of hefty exits. Groupon cofounders Eric Lefkofsky and Brad Keywell whom also began VC firm Lightbank are perhaps the bestknown examples. Yet given highprofile, sizable sales such as those of CleverSafe or Fieldglass, the pipeline of employees that cashed out or may cash out sooner rather than later could nurture a greater incidence of repeat entrepreneurs, much like Chris Gladwin of Cleversafe, who recently headed up a new enterprise called Ocient. The timeline for such a trend is elongated, hence the impact of earlier successes has been crucial. Local boosters always long for a truly massive success story, yet the role played by what some would consider more modest exits can t be discounted. Sustained decade highs in exits helped lead to recent fundraising success Venture-backed exits of Chicago MSA-based companies 16 $1,071.2 $13, $873.7 Aggregate Exit Postvalua on ($M) $3, Note: Aggregate exit post-valuations are included to better represent the total value created by IPOs in particular. They include IPO post-valuations, which are 18 $1,263.6 $4,166.5 $889.2 calculated as total shares outstanding multiplied by offering share price. 24 # of Exits Closed 4 $43.0 Unsurprisingly, corporate buyers dominate the listings Venture-backed exits (#) by type of Chicago MSAbased companies Acquisi on Buyout IPO Interestingly, PE buyers have provided significant liquidity in the past Venture-backed exits ($) by type of Chicago MSAbased companies Acquisi on Buyout IPO

12 A hefty portion of Chicago exits commanded significant MOICs Percentage of Chicago exits separated by multiple on invested capital (MOIC), * Under 1x Significant push in 2016 helped lay foundation for next investing cycle Chicago MSA venture fundraising 5 $ x 2-3x 3-5x 5-10x 10-15x 15-20x 20-25x 25-30x 19% 12% 9% 9% 19% 14% 7% 9% 2%. This table recreated and updated the same methodology as used in this article, excepting the inclusion of buyouts in this dataset. 4 $413 Capital Raised ($B) 8 $830 5 $88 3 $ $628 $75 $230 # of Funds Closed 5 $ $326 $666 2 $95 A bevy of recently closed early-stagefocused funds bodes well for the future, even if the late-stage market remains underserved purely on a domestic basis With no fewer than 10 venture funds closed since the start of 2016 through the end of April 2017, there is plenty of accumulated capital waiting to be deployed. Especially given the range of fund sizes Origin Ventures fourth, $80 million vehicle or the $66 million Chicago Ventures Fund II, for example the early-stage market in Chicago is set to be well-funded. When it comes to higher-priced segments of the capital stack, there simply aren t that many large, local players. However, as long as outside investor interest remains active on quantitative and anecdotal bases it looks set to stay robust there remains only to source for late-stage capital further abroad. It took decades to build Silicon Valley, after all perhaps local firms in the Chicago MSA will raise hundreds of millions for funds in the future, but for now, the ecosystem is still growing steadily toward that level. The majority of exits remain on the larger side Venture-backed exits of Chicago MSA-based companies (#) by size Total AUM resurges to new high after a decline owing in part to exits ramping up VC AUM in Chicago MSA $4.4 $4.2 $4.0 $3.8 $3.6 Total AUM ($B) 1 Under $25M $25M-$50M $50M-$100M $100M-$500M $3.4 $

13 Select League Tables Select rankings of most active investors and deals in Chicago Ready for the next round: companies (#) by time since most recent round Most recent round type 9-12 months months Angel/seed A B months Select 1Q 2017 venture financings of companies headquartered in Chicago Company Deal size ($M) Series/stage SpringCM $25.0 Series E CloudCraze $20.0 Late stage Sector Automation/Workflow Software Business/Productivity Software Jellyvision $20.0 Late stage Human Capital Services Shiftgig $20.0 Series C Media and Information Services (B2B) Most active investors in Chicago MSA, 2016, across all stages Hyde Park Angels 20 Chicago Ventures 12 Hyde Park Venture Partners 12 M25 Group 11 Service Provider Capital 9 HBS Angels of Chicago 8 Pritzker Group Venture Capital Bluestein & Associates 7 Wasson Enterprise 5 7 Aquilon Energy Services $19.0 Series B Database Software Pangea $11.6 Series B Financial Software Strategic Internet Marketing Partners $5.0 Late stage Application Software Jiobit $4.8 Seed Wireless Communications Equipment Maestro Health $4.0 Series A Life and Health Insurance Tovala $3.7 Early stage Social/Platform Software Pak'd $3.3 Angel Food Products OVAL Fire Products $3.2 Series B Commercial Products Source: PitchBook Bridge Investments 5 Matter 5 Source: PitchBook League tables are compiled using the number of completed VC rounds for Chicago MSA or Chicago-based companies in To ensure your firm is accurately represented in future PitchBook reports, please contact survey@pitchbook.com. Venture capital Venture capital, for the purposes of this report, is defined as institutional investors that have raised a fund structured as a limited partnership from a group of accredited investors, or a corporate entity making venture capital investments. Valuations Pre-money valuation: the valuation of a company prior to the round of investment. Post-money valuation: the valuation of a company following an investment. Exits This report includes both full and partial exits via mergers and acquisitions, private equity buyouts and IPOs. Fundraising This report includes Chicago MSA-based venture capital funds that have held a final close. Funds-of-funds and secondary funds are not included. 13

14 We do pre-money valuations, cap tables, series terms, custom search, growth metrics. You invest in the next big thing. See how the PitchBook Platform can help VCs invest smarter.